Re Madam Yau Chuk Ying

HCB000073/1981

Bankruptcy - S.37(1) of the Ordinance - where goods of the debtor remain on leasehold property in the custody of the Official Receiver as interim receiver and are sold before adjudication the landlord is not entitled to unpaid rent during that period but must prove for it with other creditors in the bankruptcy - the company law principle that the full rent is payable for period liquidator remains in possession of leasehold property "for the convenience of the winding-up" is not applicable to bankruptcy proceedings.

IN THE HIGH COURT OF HONG KONG

IN BANKRUPTCY

No 73 of 1981

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Coram: The Hon Mr. Justice Fuad.

Date: 28 July 1982

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JUDGMENT

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1. By this summons, City and Urban Properties Ltd. ("the Company" or the "landlords") put forward certain claims in the bankrupcy of their lessee, Madam Yau Chuk Ying. The facts are largely to be found in affidavits sworn by Mr. Gerald To, a partner of the firm of solicitors acting for the Company and by Mr. A.L. Robertson, the officer in the Official Receiver's department who has the conduct of the bankruptcy. The Company let five shops on the respective ground floors of five adjacent buildings at the Whampoa Estate, Kowloon to the bankrupt for a term of four years from the 8th January 1979 at a total monthly rent of $41,490 exclusive of rates. I understand that the shops were run as a "Chinese Emporium". On the 8th June 1981 Madam Yau was behind in the payment of rent and the Company instituted an action in the High Court to recover possession of the premises and arrears of rent. On the 15th July 1981 a bankruptcy petition was presented: against Madam Yau (whose interests included running a restaurant) by a number of her employees. On the following day Liu J. appointed the Official Receiver interim receiver "of all the property of Madam Yau Chuk Ying lately trading as Kwok Fu Restaurant that may be found at shop 29, Wo Che Estate Commercial Complex, Shatin, N.T. or any other premises." [Emphasis added.] On the next day (the 17th July 1981) the Official Receiver seized the contents of all the shops leased to Madam Yau by the Company.

2. What happened next is of crucial importance and this is how Mr. To put it in his first affidavit -

The Official Receiver's letter referred to in para. 6 of Mr. To's affidavit was in the following terms-

There was no acknowledgment or reply to this letter.

3. On the 15th September 1981 Liu J. made a Receiving Order against Madam Yau. On the 22nd January 1981, after lengthy and hotly contested proceedings, I adjudicated Madam Yau bankrupt. Her subsequent appeal to he Court of Appeal failed. My judgment fully reviews what happened at the meetings of creditors and I need not repeat what I said.

4. Meanwhile, on the 8th October 1981 the Company had filed A Proof of Debt which included the arrears of rent which are the subject - matter of the present proceedings.

5. As regards the eventual surrender of the lease, this is what was deposed to by Mr. To in his first affidavit-

"9. Both before and after the making of the Receiving Order, negotiations took place between the office of the Official Receiver as the Interim Receiver of the Bankrupt and myself acting on behalf of the Applicant regarding the surrender of the premises. The negotiations resulted in a Deed of Surrender dated 20th January 1982, executed between the Applicant as landlord of the premises of the first part, the Bankrupt of the second part and the Official Receiver and the Interim Receiver of the estate of the Bankrupt of the third part. A copy of that Deed is now produced and shown to me marked 'GT-4'. The Deed provides that that the tenancy of the premises should terminate on 20th January 1982, and that the rent in the sum of $82,980.00 together with rates in the amount of $3,910.00 both for the period between 21st November 1981 and 20th January 1982, should forthwith be paid by the Bankrupt out of her estate. The payment of the rents and rates provided for in the Deed was duly paid by the Interim Receiver upon the execution of the Deed. So far as the rent and rates accrued before 21st November 1981 are concerned, no agreement was reached between the parties."

6. The claim which is now before me was formally put forward in a letter dated the 7th April 1982 from the Company's solicitors to the Official Receiver's office in these terms -

"We refer to the various telephone conversation between Mr. Gerald To of our firm and Mr. M.E. Brown, of your office in which your Mr. Brown expressed the view that part of the arrears of rent and rates in respect of the above-mentioned premises might not be treated by the official Receiver as actual expenses incurred in realizing the assets of the debtor.

After examining the file on this matter and the law relating to the issue, it is our view that the arrears of rent and rates incurred between 15th July, 1981, when the Bankruptcy Petition was presented and 20th November, are part of the actual expenses incurred in realizing the assets of the debtor within the meaning of Section 37(1) of the Bankruptcy Ordinance. The premises during that period was retained by the Debtor and the Official Receiver for the convenience of the bankruptcy proceedings and with the view to the realization of the properties belonging to the Debtor therein to better advantage. As such, our clients City & Urban Properties Limited, as the landlord of the premises, ought to be entitled to priority in payment under Section 37(1) of the Ordinance. The sum owed to our clients during that period amounted to a total of $179,572.67, being $171,492.00 in respect of arrears of rent at $41,490.00 per month and $8,080.67 being arrears of rates at the rate of $5,865.00 per quarter.

Because of the Proof of Debt filed dated 8th October, 1981, by our clients covers the sums owed to our clients up to 31st October, 1981, and thus included a portion of the sum stated in the above paragraph, we have further advised them that the Proof ought to be amended so as to discount the expenses and charges incurred in the bankruptcy proceedings for which our clients are not required to prove.

Accordingly, we would be grateful if you could inform us at your earliest convenience whether or not our clients would be entitled to priority in payment in respect of the sum of $179,572.67 so as to enable us to advise them on what further steps they ought to take including an application to the Court for the amendment of the Proof of Debt."

7. By letter dated the 22nd April 1982 the Official Receiver rejected these contentions -

"Thank you for your letter of the 7th instant. The Official Receiver was appointed Interim Receiver of Madam Yau on the 16th of July 1981. As such he had no power of sale: see Section 13 of the Bankruptcy Ordinance and Bankruptcy Rule 61. The receiving order herein was made on the 15th of September 1981 at which time the official Receiver became the Receiver of the debtor's property. It is not until the debtor is adjudicated bankrupt that the debtor's property vests in her Trustee in Bankruptcy: see Section 22 of the Bankruptcy Ordinance. Accordingly, in my view your clients are not entitled to rent as expenses of the Bankruptcy."

8. To go back a little, the bankrupt's property on the landlord's premises was sold on the 9th November 1981, pursuant to an Order I made earlier that day, and this is what Mr. Robertson has to say about the matter in his second affidavit-

"2. The Official Receiver took no active steps to dispose of the contents of the premises described in paragraph 2 of Mr. Gerald To's affidavit sworn on the 17th May 1982, until the second part of October 1981: on the 26th October 1981 he advertised for sale of the contents by way of tender. The contents were eventually sold by way of tender on the 9th November 1981, this Honourable Court having sanctioned the said sale on that date. The Official Receiver had not previously takensteps to dispose of the contents because the bankrupt had maintained that either she was solvent or even if insolvent, her creditors would agree to a scheme of arrangement or composition whereby she could continue in business out of the said premises. Also, the power of sale of the Official Receiver as Interim Receiver is very limited and usually can only be exercised with the agreement of the debtor and sanction of the Court. At the First Meetings of creditors of Madam Yau held on 2nd and 9th October 1981 it appeared from, what was stated by creditors that the possibility of the creditors approving a scheme of arrangement or composition was very unlikely. Also, the Official Receiver had by this time formed the view that Madam Yau was insolvent."

9. Mr. Winston Poon, for the Company, asks me to declare that the unpaid rent for the period 15th July to the 20th November 1981(that is to say, from the commencement of the bankruptcy until rent was paid under the Deed of Surrender) was part of "the actual expenses incurred in realising any of the assets of the debtor" within the meaning of that expression in the opening words of Subsection (1) of S.37 of the Bankruptcy Ordinance, or that the rent formed part of "the actual expenses incurred by the Official Receiver in protecting or attempting to protect the property or assets of the debtor or any part thereof" as set out in paragraph (a) of that subsection. In other words Mr. Poon contends that the unpaid rent is payable and not provable. I will say at once that if I am satisfied that such is the case, I would not decline to grant the relief sought simply because the Company had earlier filed a Proof of Debt in respect of the same debt. I would, accordingly, give leave (which the summons also seeks for the Proof to be consequentially amended.

10. Mr. Poon relies on a principle well established in the company law area which might be thus briefly stated. If the liquidator remains in possession, or takes possession, of property under a lease for the convenience of the winding-up, the rent accruing due under the lease must be paid in full to the lessor out of the assets of the Company - otherwise the landlord can only prove for the debt. Many cases were cited to me showing the application of this principle but after what I am sure was exhaustive research, no case was found which applied the same principle to the law of bankruptcy. There can be no doubt that the process of winding up a company if it is insolvent closely resembles bankruptcy proceedings. While the procedure is separate it has many common features. The main difference, perhaps, in the context of the matter before me is that the property of the Company does not vest in the liquidator, whereas the property of a bankrupt does vest in his trustee, upon his adjudication. But the making of a receiving order vests no estate or interest in the official Receiver.

11. Mr. Robertson for the Official Receiver contended that the principle advanced by Mr. Poon had no application to bankruptcy proceedings for there were material differences. A liquidator, on appointment, assumes the powers and functions of the directors and he takes into his custody all the property of the company. Although, subject to this, his duties are those which are spelled out in the order appointing him, usually his powers are restricted to taking possession of, and protecting the company's assets. Mr. Robertson points out that until his appointment as trustee (which might not happen) the Official Receiver has no interest in the lease, whereas a company must act through someone, and it does so through its provisional liquidator. He drew attention to the fact that the cases use the formulae "where a company remains in possession" and "where a liquidator remains in possession interchangeably - that is to say the liability of the company and that of its liquidator is one and the same. But the Official Receiver has no contractual obligation to pay rent as an interim receiver, either before or after the making of a receiving order. Mr. Robertson added that the Official Receiver could reasonably have assumed that the landlords would prove for the rent due in the normal way, as was borne out by events.

12. The effect of receiving order and the duties of the Official Receiver were explained by Williams J. in Re Wells and Croft, Ex parte The Official Receiver (1895) 72 LT 359, at p.360-

"It is quite true that upon the making of a receiving order, there is no transfer of the debtor's estate to anybody in trust for creditors. That does not take place unless and until there is an adjudication; but, at the same time, the power of the bankrupt to deal with his property or to give charges on his property comes to an end with the receiving order, and it is not convenient in my judgment that the official receiver should take a charge in the form taken here from the bankrupt. The Bankruptcy Act does not mean that the official receiver should administer the bankrupt's estate immediately; it only means that until it is known whether or not there will be an order for adjudication, the goods should remain in the custody of the law and the official receiver is the person appointed for that. He acts under sect. 70, and, except for the protection of the debtor's property and the disposition of perishable goods, it is not intended that the official receiver in his character as interim receiver should realise the estate or deal with it or encumber it. So that to take a charge of this kind is wrong though it may be occasionally a prudent thing to get the consent of the debtor to a particular dealing with property, but if the official receiver wishes to exercise any powers other than those defined in sect. 70, sub-sect. 2, he should apply to the Board of Trade."

13. Mr. Robertson also pointed out that the landlords had chosen not to exercise the right of distress accorded them by S. 40 of the Bankruptcy Ordinance. If they had sought to distrain, the official Receiver could have given them the usual binding undertaking to pay the rent for which they were entitled to distrain, out of the proceeds of the distrainable goods when sold (if he had been in a position to do so) as sanctioned by Re Chapman, Ex parte Goodyear (1894) 10 T.L.R. 449.

14. Mr. Robertson submitted that since the Company had not exercised their rights, their only remedy was to prove for their rent. If, however, the Court were to hold that there was no essential difference between the position of a liquidator and an interim receiver, he contended that even on the authorities cited by Mr. Poon, on the facts here the rent claimed was only provable.

15. He drew my attention cases which established that where a trustee in bankruptcy applies for leave to disclaim a lease, the Court will not order any compensation to be paid to the landlord unless the trustee kept him out of possession of the property and his occupation has resulted in a benefit to the bankrupt's estate (Ex parte Izard (1883) 23 Ch. D.115). And in Ex paste Arnal (1883) 24 Ch. D. 26 the Court of Appeal adopted the rule laid down by Cotton L.J. in Ex parte Isherwood (1882) 22 Ch D. 384 in these words -

"In determining what he (the trustee ought to pay, regard must be had to two things, whether the occupation has either in, fact produced a benefit to the bankrupt's estate, or was contemplated as likely to produce a benefit, and the circumstance that, in consequence of the disclaimer relating back to the date of adjudication, the owner of the estate is in the interval between the adjudication and the execution of the disclaimer in this position, that he has been lawfully kept out of the use of his property by virtue of the operation of the lease, and cannot after the disclaimer bring any action against the person who without his consent has been in the occupation of the property. These two things ought to be taken into consideration."

16. Mr. Robertson suggested that these authorities reveal the true principle in bankruptcy cases - a trustee after his appointment may in all the circumstances be ordered to pay rent but not an interim receiver.

17. Not without some difficulty I have reached the conclusion that Mr. Robertson is right. I find no warrant in the authorities cited to me to extend their application to bankruptcy cases. The severely limited powers of the Official Receiver as interim receiver do not give him the freedom allowed a liquidator (or the Company) to take possession or remain in possession of leasehold property. It is not without significance that Liu J.'s order of the 15th July 1981 appointed the Official Receiver as Madam Yau's interim receiver in respect of "all her property ..... that may be found [at specific premises at Shatin] or any other premises". I do not think it to be a sound proposition simply to equate the position of a company/liquidator to that of a debtor/interim receiver. If I am right this would explain why no case could be found stating the principle relied upon by Mr. Poon as applied to Bankruptcy Law - nor is the principle mentioned in the leading text-books on bankruptcy. However, in case I am wrong, I propose now to approach the matter before me on the assumption that there is no essential difference between the position of a liquidator and that of an interim receiver in relation to leasehold property.

18. The authorities relied upon by Mr. Poon are collected together and reviewed by Pennycuick V. -C. in In re Downer Enterprises Ltd. [1974] 1 W.L.R. 1460. I respectfully consider that I can do no better than to set out the Vice-Chancellor's analysis of the cases and the principles to be derived from them, at p.1465 -

19. I would remark here that right at the end of this passage, I think the Vice-Chancellor made a slip of the tongue and meant to say "the liquidator's motivation" and not "the landlords". In that case the Company went into liquidation in November 1971 and rent was in arrears at that date and accrued thereafter. The liquidator originally wanted to disclaim the tenancy but on advice decided to retail it with a view to selling the leasehold interest. He did not carry on the Company's business, nor did he make use of the property. However some five months later, in 1972, he give instructions to agents to find a purchaser. In January 1973 the leasehold interest was sold. On those facts, Pennycuick V.C. that from the date upon which the liquidator had given instructions to find a purchaser he must be treated as having remained in possession of the property with a view to its realisation to the best available advantage, or put another way he must be treated as having kept the property in order to sell it or do the best he could with it. The rent from the time the instructions to find a purchaser to the date of the sale of the lease-hold interest had to be regarded as an expense of the winding up and was, therefore, payable in full.

20. I would interpolate here the authorities which show that where possession of leasehold property has been retained for the benefit of both landlord and tenant, the landlord can only prove for the rent: Re Bridgewater Engineering Co. (1879) 12 Ch. D. 181, Re Lancashire Cotton Spinning Co., ex parte Carnelley (1887) 35 Ch. D. 656 and Re Higginshaw Mills and Spinning Co. [1896] 2 Ch. 544.

21. Mr. Poon relied heavily on the official Receiver's letter of the 27th July 1981 which I have already read. He submitted that this amounted to and interference with the property. If the landlords had sought to exercise their right to re-enter under the lease, he had no doubt that the Official Receiver Would have objected. They had complied with his request. Para 5 of Mr. To's affidavit (also set out above) is rather vague and I have no reason to suppose that the letter does not accurately reflect precisely what the Official Receiver was asking of the Company all along. I think Mr. Poon was putting the matter far too high, for the letter, surely, means exactly what it says. The Official Receiver was simply, asking to be informed if the civil action pending at the suit of the landlords was to be proceeded with. I would note here that when Liu J. constituted the official Receiver an interim receiver, while he stayed four actions pending against Madam Yau, he made no order in respect of H.C.A. No. 4644 of 1981. Mr. To's affidavits state the relevant facts but do not go on to assert what the company did, or refrained from doing, in consequence of the official Receiver's letter. However that may be, on the authority of the A.B.C Engineering Co. and the Downer Enterprises cases, if in fact the liquidator has retained possession "for the convenience of the winding up" it does not seem to matter what the Company did or did not do. And Re North Yorkshire Iron Company (1878) 7 Ch. D.661 is clear authority for the proposition that it is no answer to a claim of this sort that the landlord did not choose to exercise a power of re-entry that he had. On the other hand it must also be borne in mind that an interim receiver has no power to disclaim a lease on the grounds that it is onerous.

22. In my judgment, on the facts, apart from writing the letter just discussed (which I do not regard as interference with the landlords' interest) the Official Receiver did nothing in relation to the property. He did not remain in possession of it or obtain possession of it. He exercised no dominion over the property at any relevant time for the purposes of the bankruptcy. It is true the bankrupt remained in possession of the shops, and the contents were not sold until the 9th November 1981, but it seems to me that if the Company's claim were to succeed in these circumstances, it would mean that where a debtor's goods remain on leased property after the commencement of a bankruptcy and are eventually sold, the landlord would be able to claim rent in full. I do not think that this can be so - the landlord can protect himself in the usual run of things, to a certain extent, by exercising the power of distress given by s.40 of the Bankruptcy Ordinance and unless the Court grants a stay (no doubt a stay would only be granted on terms) he could recover possession of his property.

23. I reach the conclusion that the Company has not discharged the burden of satisfying me that the rent claimed was part of the "actual expenses incurred" within the meaning of that expression in the opening words of subsection (1) of s.37 of the Ordinance or in paragraph (a) of that subsection. The summons must therefore be dismissed and I make an order nisi under 0.42 r.5A against the Company in favour of the Official Receiver, as to costs.

Representation:

Mr. Winston Poon instructed by T.S. Tong & Co. for the Applicant.

Mr. A.L. Robertson for the Official Receiver.